Friday, November 19, 2010

Short-Run Pain Can Lead to Long-Term Benefits

As the building industry continues to wait for a sustained rebound which stubbornly refuses to appear, it’s easy to grow frustrated with economists and prognosticators who seem to constantly update their forecasts. So what’s going on?

One reason that it’s hard to get a handle on the economy is because the federal government has pursued various policies which have simply postponed the inevitable consequences of the past. In times of great economic duress, this makes sense, as too many negative hits at once can send an economy into a tailspin leading to a depression. But by spreading out these hits over time so the economy can adjust, any recovery is also muted.

Another reason it’s been difficult to gauge the timing of a rebound is that the bust in housing demand and prices hasn’t been uniform across the country: while Arizona, Florida and Nevada continue to suffer disproportionately, places like Texas and Washington, D.C. are on the mend. In addition, when real estate bubbles pop, it’s not like they re-inflate immediately – the market tends to bob along the bottom for two or three years before sustained demand is possible. An even with mortgage rates now at generational lows and home price affordability far higher than during the boom years, the demand for housing now simply needs ample time to recharge its batteries.

In the meantime, this recharge is continuing unabated, only instead of living in their own homes, potential new households are doubling up with roommates and with family members while waiting for job growth to return. In general, between 1960 and 2005, the United States has averaged 1.2 million net new households per year. In some years builders have certainly over-built relative to demand, but in many others years (such as during recessions), they can’t build enough homes.

According to a recent study conducted by the NAHB, although the nation’s builders certainly over-built single-family homes from 2003 through 2005, the cumulative surplus relative to population growth was completely worked off by the end of 2007. That’s not to say we still don’t have a huge over-supply relative to buyers’ ability to buy or qualify for mortgage loans – it just means that based on historical precedent and average household sizes, the nation is technically under-housed.

In fact, between the end of 2007 and 2009, the sharp declines in new building led to a projected deficit of nearly 2.2 million units. By the end of this year, that deficit will have reached nearly 3.3 million units. In other words, as the foreclosure pipeline is eventually addressed – and it must be in order to clear the inventory of homes in default -- this country will face a tremendous pent-up demand for new housing across the entire income spectrum.

And yet, much like the nascent recovery, this pent-up demand differs from state to state. A similar analysis conducted by the NAHB for each state showed some of the states with the most foreclosures – such as Arizona, Florida, Nevada and California – have still racked up single-family housing deficits relative to population growth ranging from 50,000 to 145,000 homes.

At the recent Building Industry Show in Southern California, the energy this year was much different than in 2009. Not only was it more hopeful, but I heard stories of multiple deals getting done in order to start prepping for the rebound. While it was still gallows humor from land brokers and lenders opining on panels, the general consensus was that 2010 would go down in history as one of those years in which the industry’s survivors hang on because they know that the rebound – when it comes – will be formidable.

Wednesday, November 17, 2010

November column for Builder & Developer magazine now online

My column for Builder & Developer magazine is now posted online. For this month's issue, which is entitled "Promoting Green Living as a Lifestyle" -- I wanted to discuss how builders can leverage their model homes to show prospective buyers how using green products throughout the home can extend far beyond brick, mortar and drywall.

An excerpt:

Imagine, if you will, walking through what looks like a fairly typical model home complex for a new green community. Perhaps it offers the latest in energy-efficient appliances, LED lighting, solar panels, drought-tolerant landscaping, and more. But in addition to that, the homes in question feature an array of sustainable consumer products – tightly secured to tables, cabinets and countertops, of course -- that the eventual occupants might use in their daily lives.

From household chemicals and children’s toys to food and personal care items, to obtain ratings on the greenest of the green, these shoppers would only need to scan product bar codes via an iPhone application or visit the Web site for a new company called the Good Guide. Started in 2004 by a professor of environmental policy at UC Berkeley named Dara O’Rourke after he realized he didn’t really know what was in the sunscreen being applied to the face of his two-year-old daughter (which, after testing in his lab included a suspected carcinogen as well as a chemical which could disrupt hormones), O’Rourke’s goal is to bring academic-quality research on everyday products to the masses.

As I was reading this story recently in a national newsmagazine, I couldn’t help but think how easy it would be for homebuilders to leverage the mainstreaming of green products into their own sales and marketing campaigns. In September of 2010, the site for Good Guide tracked 300,000 visitors who reviewed its ratings on more than 75,000 items, so the interest is certainly there. It’s also an opportune time to provide objective research – sort of a Consumer Reports for green products – to a general public who overwhelmingly say they prefer environmentally responsible products in surveys but have grown increasingly wary of ‘greenwashing.’...

Click here to read the entire column.

Click here to read the entire magazine in digital format.

SoCal home sales dip in October

There are two stories in the Los Angeles Times and the Riverside Press-Enterprise for which I opined yesterday. In both cases, I wanted to stress that (a) by October we're starting to move into the slowest quarter for home sales (both new and existing) and (b) we have no choice but to pay the consequences of the tax credit programs and other incentives which borrowed demand from the future. While I certainly support the idea of spreading out economic pain to avoid a depression, anyone who expresses surprise at falling sales when the market has to abide by normal fundamentals simply wasn't paying attention in Econ. 101.

You can find the L.A. Times story here.

You can find the Riverside Press-Enterprise story here.

Wednesday, November 10, 2010

Press release from 2010 Riverside San Bernardino Economic Forecast Conference

NEW ECONOMIC FORECAST FOR RIVERSIDE/SAN BERNARDINO REGION FINDS CAUSE FOR HOPE, CONCERN… BUT ABOVE ALL PATIENCE

November 9, 2010

RIVERSIDE, CA—A new economic forecast focused on the inland regions of Southern California finds signs of economic recovery mixed with examples of continued sluggishness.

The forecast, authored by Beacon Economics and released in partnership with the University of California, Riverside’s School of Business Administration, says that relative to California, the unemployment rate in Riverside and San Bernardino Counties is expected to fall faster. However, substantial job growth won’t be evident in the region until the last half of 2011, and the unemployment rate in Riverside and San Bernardino counties will remain above 8 percent through 2015

“The job recovery is beginning but it’s going to be slow. U.S. labor markets, in general, now take significantly longer to recover after downturns than they did in the past,” says Beacon Economics’ Founding Principal Christopher Thornberg. “The phenomenon of the ‘jobless recovery’ appears to be a permanent part of the economic landscape.”

David W. Stewart, dean of UC Riverside’s School of Business Administration says that the future of the economies in Southern California’s inland regions lie in the industries that drove growth before the housing boom.“We have a significant, though often overlooked, manufacturing base to build upon,” Stewart says. “And we have the key locational advantages of distribution infrastructure, ready access to both domestic and export markets, and the potential for stable sustainable electricity rates with the growth of solar, geo-thermal, wind, and other new sources of energy. No other part of the country has this winning combination.”

The School of Business Administration used to release an annual economic forecast, and it has now been revived. “As a land grant institution and the only research-based business school in inland Southern California, it is our mission to stay engaged with the economic welfare of our region,” Stewart says.

Key U.S., California, and Riverside/San Bernardino findings from the forecast include:

  • United States: The decline in consumer spending has followed an extended period of overspending; do not look for a jump in demand driven by consumer spending.
  • California: Total nonfarm employment will cross the 14 million milestone in 2011 but will not reach its pre-recession peak of 15.2 million jobs until mid 2015
  • Riverside/San Bernardino Counties: Home sales will continue to fall into 2011 but will then return to growth driven by increasing population and pent up demand.

2010 Riverside San Bernardino Economic Conference materials now online

If you missed Beacon Economics' 2010 Economic Forecast Conference for Riverside San Bernardino on November 9th, you can still download the conference book for FREE! As part of our ongoing partnership with Beacon, MetroIntelligence Real Estate Advisors authored the sections on residential and commercial real estate.

Click here to download entire conference book.

Click here to download the section on residential real estate only.

Click here to download the section on commercial real estate only.

Thursday, November 4, 2010

Riverside-San Bernardino Economic Forecast Conference, Nov. 9th, 2010

Where is The Economy Headed?

The stock market-fueled optimism that marked the beginning of the year gave way to near panic over a potential "double dip" as the recovery slowed sharply in the second quarter. More recently, better signals have started to emerge leaving many to wonder where the U.S. and California economies are heading in 2011?

And what about Riverside and San Bernardino Counties? For decades manufacturing, trade firms, and the logistics sector were engines of rapid and diverse economic development. With the bursting of the housing bubble, are these sectors once again poised to drive growth in the region?

Join some of California's most well-respected forecasters, economic development experts, and local business leaders as they reveal the direction of the U.S., California, and Riverside-San Bernardino economies.

Get Answers to the Following Questions:

  • Is the economy out of the woods or is there a real chance of a 'double dip' recession?
  • What is not up? Interest rates. Is it a bond bubble or are deflation fears real?
  • Tax increases or deficit expansion... which poses the bigger risk?
  • How is California shaping up? Are we ahead or behind in the recovery?
  • Riverside and San Bernardino Counties were some of the hardest hit economies in the nation... but is a new phase of growth beginning?
Registrants Receive:
  • 2010 Riverside-San Bernardino Economic Forecast Book - a data-packed analysis of the region's economic indicators
  • Quarterly updates to the forecast for one full year
  • Chance to interact with forecasters and speakers
  • Prime networking opportunity
  • Breakfast buffet
  • Hosted self-parking
Want to register? Click here.

Tuesday, November 9, 2010
Riverside Convention Center
3443 Orange Street, Riverside, CA 92501
Registration and Breakfast: 7:00 AM
Program: 8:00-10:30 AM
Tickets:
$100 /Individual
$75 /Discount Affiliate Rate
$40 /UCR Student Discount Rate (ID required)
$500 /Table of 8
Seating is limited so register today!
Featured Speakers

Christopher Thornberg
Principal
Beacon Economics

Brad Kemp
Director of Regional Research
Beacon Economics

Roy Paulson
President & CEO
Paulson Manufacturing

Dr. Alfredo Martinez Morales
Managing Director
Southern California Research Initiative for Solar Energy

Peter B. McWilliams
Managing Director – Industrial Services
Jones Lang LaSalle

Iddo Benzeevi
President & CEO
Highland Fairview